Late payment drop shows impact of credit reforms

NEW YORK 
Consumers struggling to pay their bills in the first few months of the year got an immediate benefit from credit card reforms.

Late credit card payments fell sharply in the first quarter, and at least part of the drop can be attributed to the law that kicked in Feb. 22 curbing interest rate hikes and various fees.

The rate of borrowers who fell 90 days or more behind on their cards dropped to 1.11 percent for the first quarter, down from 1.32 percent in the 2009 period, according to credit reporting agency TransUnion. The delinquency rate was also down from the fourth-quarter of 2009, when it stood at 1.21 percent.

The rate hovered between .50 and .75 percent before the recession, and was at its highest in the first quarter of 2009.

Average credit card debt also fell in the first quarter, to $5,165. That's down 10.6 percent from $5,776 at the start of last year.

"We seem to be headed in the right direction," said Ezra Becker, director of consulting and strategy in TransUnion's financial services unit. The company culls its data from 27 million consumer records each quarter, about 10 percent of its database of active credit files.

Becker pointed to credit card reforms with making it easier for consumers to pay their bills.

Before the law took effect, a bank could have raised a customer's interest rate without warning. That would have driven up the minimum payment due. Now, banks can't raise interest rates before giving customers 45 days notice, and can't hike rates on existing balances. The law also curbs over-the-limit fees and penalty fees, and mandates that payments above the minimum be applied to balances with the highest interest rate first.

These restrictions helped keep balances down, which in turn kept minimum payments lower, Becker explained. Minimum payments are usually a percentage of total balance.

To be sure, reining in rate hikes and excessive fees is not the only reason for the delinquency decline. Consumers have been working to reduce their debt as the effects of the recession linger and unemployment remains high. And many cardholders have taken to paying their credit card bills before even their mortgages, a flip from historical norms in the so-called payment hierarchy that reflects the importance of credit cards for managing household spending.

Reforms account for about one-third of the total drop in delinquency, estimated Richard D. Hastings, a consumer strategist with Global Hunter Securities. He said the rest of the drop could be attributed to cardholders' improved efforts at budgeting and the effect of tax refunds, which many people used to pay down debt in the first quarter.

Whatever's behind the drops in both delinquency and balances, they're good signs for the broader economy, Hastings added. "It's bullish for consumer spending," he said. "The more people pay down their short-term debt, the better it is."

Debt is likely to stay lower, Becker noted, because banks have pulled back on how much credit consumers have available. The number of new cards opened during the quarter dropped almost 24 percent from the 2009 period.

TransUnion expects card payment delinquency to keep falling, possibly dropping below 1 percent by the end of the year. The rate was last below that mark in the second quarter of 2007, before the recession hit.